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Testing Optimal Punishment Mechanisms under Price Regulation: the Case of the Retail Market for Gasoline

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Author Info
Robert Gagné () (IEA, HEC Montréal)
Simon van Norden () (IEA, HEC Montréal)
Bruno Versaevel

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Abstract

We analyse the effects of a price floor on price wars (or deep price cuts) in the retail market for gasoline. Bertrand supergame oligopoly models predict that price wars should last longer in the presence of price floors. In 1996, the introduction of a price floor in the Quebec retail market for gasoline serves as a natural experiment with which to test this prediction. We use a Markov Switching Model with two latent states to simultaneously identify the periods of price-collusion/price-war and estimate the parameters characterizing each state. Results support the prediction that price floors reduce the intensity of price wars but increase their expected duration.

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Publisher Info
Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 06-12.

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Length: 29 pages
Date of creation: Oct 2006
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Handle: RePEc:iea:carech:0612

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Related research
Keywords: price regulation oligopoly supergame Markov switching model gasoline

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Find related papers by JEL classification:
L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
L81 - Industrial Organization - - Industry Studies: Services - - - Retail and Wholesale Trade; e-Commerce
C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models

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